When I said nothing, I really mean nothing. My uncle, Uncle John, who’s merely 7 years older than me, had nothing when he first landed in Canada.
It wouldn’t be far off if you use the term FOB (Fresh Off the Boat) to describe how he got to Toronto. He was trained to be an engineer on a cargo ship in a college in China. He is the youngest of 7 siblings from my mom’s side.
He just happened to arrive with his ship at a town in BC two hours north of Vancouver, shortly after my family moved to Toronto from Hong Kong.
With the small amount of pocket money provided by the shipping company that he worked for, he managed to take a cab ride to Vancouver and rented a motel to stay for a night. My mom was able to pay for his ticket at the time and he flew over to Toronto the next day.
That was over 15 years ago.
He had since worked as a bus boy in a local Chinese restaurant for years. He realized that job didn’t really have any future. He then worked as an apprentice in a HVAC company providing customers with tips to maintain your hvac. He progressed rapidly within the business too. With his background in machinery, he started his own HVAC business a couple years later. HVAC businesses are those that deal with issues of heating, ventilation and air conditioning, and companies like Rapid Repair Experts Cary, nc might be worth having a look at if you require any HVAC services. If you’re looking to start your own HVAC business, you might want to check that you know How Much Does It Cost to Get HVAC Certified. Once you know this, you will have a much better idea of whether you should start your own HVAC business.
Today, Uncle John is married and has two young boys. He owns three properties, combined of over $1.5M in value and a business that’s sufficient to support his entire family. He has more business than he can handle. He has to turn away some of our referrals.
Contrary to common belief, not every immigrant comes with money.
But if you work hard, have good ethics, are willing to take some risk, and put some savings aside, have a small business accountant as part of your team, you too can create your own Canadian dream.
As a real estate investor myself, we get so hyped up with buying the next investment property. We often forget about our own home, which is the biggest tax free asset that you can own in your life!
Believe it or not, $1 appreciation in your home is equivalent to $2 of rental income you earn (if you are at the highest marginal tax bracket).
Uncle John made some decent money from his business. He invested in penny stock and he invested in a small commercial unit in Scarborough thinking he would open up a store to attract more business.
He didn’t make a dime off any of these investments.
He is losing money every year at his commercial unit. He barely broke even on his penny stock investments.
He learned about real estate investment a couple of years after seeing a few of his friends accumulating tax free wealth by upgrading their homes every few years.
He bought a pre-construction home 3 years back. He just recently sold the property after staying there for a few years.
He made over $150K, using the biggest tax free asset a taxpayer is allowed from this property.
He finally made his decision to sell the commercial unit and liquidate all his penny stocks, putting everything he has in his principal residence to get a bigger and better home for his family. He decided, along with his wife, that the best way to do this was to build their own home with the help of a Toronto Custom Home Builder. This was, the house would be perfectly designed to meet their own needs and will last them much longer than a house they have just bought.
Time will tell whether this will be a good investment decision.
But as of today, he’s accumulated over $1.5million of asset in the last 15 years, starting from absolutely nothing.
The Canadian Dream can come true, with a bit of luck, a lot of hard work and a good Toronto accountant. 😉
Until next time, happy real estate investing.
Cherry Chan, CPA, CA
Real Estate Accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
Recently one of my blog followers asked me this question: what is the best way to avoid paying tax on capital gain on sale of properties?
Sadly, unless you don’t make any gain on the sale of your real estate portfolio, you will have to pay tax.
Are there ways to minimize the tax on capital gain?
Absolutely, unfortunately there is no way to avoid such taxes. Unlike in the United States, we are not allowed to roll the capital gains into the next property and defer all the gains.
With careful tax planning and ownership structure, you can share the ownership with a lower income spouse or your children or your parents. That way at least a portion of the gain can be taxed at a lower average rate.
Of course, there can be concerns that the gain can be attributed back to the higher income spouse. Consult a professional before making any decision on the ownership structure.
Another way that can help to reduce the taxes is that you can have a vendor take back mortgage. You are allowed to take a reserve, also meaning deferring a portion of the capital gain on the sale of your real estate investment over a maximum of 5 years, if you agree to take on a vendor take back mortgage.
You are allowed to deduct a capital gain reserve in the first four years, so the reserve will be reported in subsequent years as capital gain. The formula to calculate the reserve is below:
This formula is also subject to a cap – which is calculated as a percentage of the capital gain:
Year of sale – maximum amount of capital reserve (deferral) = 80% of capital gain
1st year after sale – maximum amount of capital reserve (deferral) = 60% of capital gain
2nd year = 40%, 3rd year = 20% , 4th year after sale = 0% deferral
Let’s use an example.
Purchase price = $300,000
Sale price = $500,000
Capital gain = $200,000
Initial deposit = $100,000
Outstanding balance = $400,000 repayable at $80,000 per year for five years
So for the year of sale, the capital gain can be deferred is calculated
Capital gain on the sale of property = $200,000
Deferral allowed based on the calculation = $160,000
Capital gain reported = $40,000; net capital gain = $20,000
Year 1 after sale, the capital gain deferral is calculated as follow:
Capital gain required to be reported = ($200,000 – $40,000 (reported in year of sale)) = $160,000
Deferral allowed based on the calculation = $120,000
Therefore, capital gain reported = $160,000 – $120,000 = $40,000; net capital gain = $20,000
Year 2 after sale, the maximum amount of capital gain deferral is calculated as follow:
Outstanding balance of capital gain to be reported = $200,000 – $40,000 – $40,000 = $120,000
Deferral allowed based on the calculation = $80,000
Therefore, minimum capital gain reported in year 2 after sale = $120,000 – $80,000 = $40,000
So on and so forth for year 3 and year 4 after sale.
You may wonder how this would help you save taxes. It will only help you if you are not making more than $220K annually on your personal tax return.
The Canadian personal tax system is a progressive tax system. This means that the more you make, the higher the tax rate and hence the more tax you will need to pay.
Say you make $50,000 job income, you pay about $8,570 tax in Ontario in 2015.
If you report the $200,000 capital gain in 2015, your total tax payable is $48,173, meaning $39,603 belongs to the capital gain.
Now, assuming the tax bracket stays the same for the next five years, every year, the tax payer reports $20,000 of net capital gain in addition to the job income of $50,000, a total of $70,000 taxable income. Total tax payable every year is $14,800, of which $6,230 is related to the net capital gain.
Over five years of reporting total tax payable related to the net capital gain = $6,230 x 5 = $31,150.
Saving is $8,453 ($39,603 – $31,150).
Now, if you own the properties in the corporation, the same deferral is available to the corporation given that the proceeds are being paid over the years. However, the tax rate on the net taxable capital gain you earn is still 46.17%. Whether you pay the tax today or pay the tax over five years, the tax rate is still the same.
Before you proceed to use this strategy, make sure you speak to us positioning yourself properly.
Until next time, your real estate investment accountant,
Cherry Chan, CPA, CA
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
“The person who signs your paycheck controls your life. Shouldn’t that person be you?” ~ Robert Kiyosaki
I just saw this quote from Robert Kiyosaki’s facebook page today. Many of us know him as the author of “Rich Dad Poor Dad”. I am one of the millions of people who got inspired by his book “Rich Dad Poor Dad”.
I am almost embarrassed to admit that I had no idea what asset meant at one point, even though I was professionally trained to understand what assets and liability mean in school! Asset, according to Robert Kiyosaki, is something that generates cash flow and returns on a monthly basis.
Looking back in the last few years, this book, together with a few other things, had transformed my life entirely.
I left my 6 figure cushy corporate job, refinanced my principal residence and purchased a student rental the same year. Now we have a few of more investment properties, generating passive cash flow and steady return monthly. We even turned our principal residence into a partial asset – we are generating sufficient cash flow to pay off a big chunk of expense of our house.
The journey wasn’t always easy. There were moments I questioned why I left the cushy corporate job, especially when I was pregnant without mat leave pay and when I had to pay for my own prescription drugs.
At the most recent Mr Hamilton Inner Circle meeting, Quentin of Durham Real Estate Investing spoke about his property management philosophy and his new book. As always, he gave away so many great tips on dos and don’t on managing property. Even Robin got to learn a lot from him!
Quentin was a teacher before. He left his job, and big pension, to become a full time real estate investor.
He mentioned in his speech that there were so many benefits of owning your own business. One of the biggest advantages is the tax write-off you get.
If you use a portion of home to operate your business, you can write off that portion of the home office expense, subject to certain criteria set out in the Income Tax Act.
If you use your car to meet your clients, sometimes you may get reimbursed by the company for the mileage, but for the most part, the cost can’t be written off. Going to office everyday isn’t an allowable deduction in your tax return unfortunately. As a business owner, mileage for the purpose of earning business income is deductible.
Most importantly, for small business owners who do not need every penny from the business to support their daily lives, we leave as much earning within the corporation as possible and enjoy the low tax rate of 15.5%.
If you earn $250K with a job, you pay $96,610 tax, roughly 39% of tax in 2015. If you own your business, you pay $38,750 within the corporation.
There isn’t much of a difference, just $57,860 more if you leave the income in the corporation. Imagine what you can invest in using this additional $57,860 within the corporation!
It is a tax free and interest free government subsidized investment that all small business owners qualify for.
With a corporate job, the person who controlled my life had usually been my direct boss. Today it is myself.
The benefit of owning a business just outweighs all the employment insurance benefits and dental care benefits I missed.
Until next time, happy investing.
Cherry Chan, your real estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
I was at the Real Estate Investment Network (REIN) annual Authentic Canadian Real Estate (ACRE) event last month. One veteran investor said that she would not touch any real estate investment if it doesn’t provide at least 30% return annually.
30%! You heard me right!
Probably the only way to achieve this type of return is to invest in a highly leveraged investment vehicle (like real estate or margin account) or have your own business.
Even with a 30% return investment, you don’t really get a 30% return! Let’s remember we have an often forgotten investment partner – Canada Revenue Agency (CRA).
If you earn over $89K job income and above in 2015, CRA takes away about 43% and more on any of your return on investment. This leaves you with 17% after tax return.
17% after tax return is an awesome return, don’t get me wrong! But if there is a way to even lower the tax man’s share, wouldn’t it be great?
Most investors, who make over $89K annually, want to have their lower income spouse to report all these investment income. Since the lower income spouse makes little or no income, the marginal tax rate can be as low as 0% (if the investment income is below the personal tax exemption), leaving the full 30% return in your pocket!
This idea is wonderful but CRA doesn’t really like it. There’s something called Attribution Rule that can “attribute” all these investment income back to the higher income spouse – Meaning that the higher income spouse would still have to report all the investment income in the tax return. CRA imposes this based on the fact that the high income spouse is the one who makes the money for the downpayment and hence the income on the investment property should belong to the higher income spouse.
But there is a way out!
If the lower income spouse “borrows money” from the higher income spouse and pays the higher income spouse interest at a rate at least at the prescribed rate or an arm’s length rate (commercial rate), attribution rule will not apply.
Prescribed rate is a rate calculated by a formula in the Regulations under the Income Tax Act. Currently the prescribed rate is 1%. If you require expert legal advice from a Canadian income tax lawyer for analysis on the CRA’s tax collection powers, you may want to head to taxlawcanada.com and speak with their professionals about your concerns.
The higher income spouse has to report the 1% interest income on the personal income tax return. The lower income spouse can report this as a corresponding deduction against the property income.
So long as the property can provides more than 1% return, it is almost always worthwhile to setup the prescribed rate loan.
It’s also important to note that the interest must be paid within 30 days after the year end. If the taxpayer fails to do so, this loan will lose the status of the prescribed rate loan forever.
Let’s use a quick example to illustrate.
Say Spouse A earns $150K job income a year and Spouse B stays home to take care of the kids and has no income.
They purchase a student rental, which generates $10K of net income a year.
If Spouse A has to report the $10K in his tax return, he pays 48% tax on it. Leaving $5,200 after tax money.
Since Spouse B doesn’t have any other income, it will be ideal if she reports the entire income.
Using the Prescribed Rate loan strategy, Spouse B pays 1% of the loan to Spouse A. Say the property is purchased at $300K, downpayment 20% is $60K. 1% interest on the $60K is $600.
Spouse A reports $600 as income (instead of $10K), pays $288 tax ($600 * 48%).
Spouse B has no other income and reports $9,400 as income ($10,000 – $600). Pays no tax.
Combined tax liability from the investment = $288 + $0 = $288.
Tax savings = $4,800 (if reported 100% by Spouse A) – $288 (using Prescribed Rate Loan strategy) = $4,512 annual savings.
After tax cash = $10,000 – $288 = $9,712
Not bad, isn’t it?
This article is for information purpose only. Consult a professional accountant and lawyer before setting this up.
Until next time,
Cherry Chan, Your real estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
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